It was Ariel Sharon's walkabout at the al-Aqsa mosque in Jerusalem that triggered the intifada, but - coming in the wake of the failure of the Camp David talks - it was in one sense a revolt against the Oslo process, which had delivered so little to Palestinians in their daily lives, while Israel forged ahead with settlement expansion and land confiscations. Since then, more than three times as many Palestinians have been killed as Israelis (2,648 to 842) - five times as many when it comes to children. As the former US senator George Mitchell reported in 2001, there was no plan by the Palestinian leadership to launch a "campaign of violence" - even if some tried to ride the tiger of popular anger - and the bloodshed was unleashed by Israeli troops repeatedly using live ammunition against stone-throwing demonstrators. In the first 10 days after Sharon's visit, 74 Palestinians were killed as against five Israelis. Even then, the character of the intifada as a mass popular movement against occupation continued and it was not until the early months of 2001 that the suicide attacks began.

The experience of Zakaria Zubeidi is typical. In a secure house in Jenin refugee camp, the 27-year-old local leader of the Fatah-linked al-Aqsa Brigades, recalls how he and other activists demonstrated at the main Israeli checkpoint outside the West Bank town during the first weeks of the intifada. "Almost every day, one of the demonstrators was shot dead. Eventually, we gave up throwing stones and in the same place where the Palestinians had been killed, we killed an Israeli soldier." Zubeidi, who still believes the Oslo agreement was a "good step", helped run a "peace theatre" with Israelis in the 1990s. Now he is a hunted man whose mother was shot dead at her window by an Israeli sniper last year and whose brother was killed in the 2002 siege of Jenin. As we talk, he and his bodyguards leap to their feet every time a car accelerates down the alleyway outside - raids by Israeli hit squads are commonplace. Although the Brigades were drawn into launching suicide attacks in Israel at the height of the conflict, Zubeidi insists they are "against operations inside Israel unless the Israelis exceed certain limits, such as assassinating our leaders. We are here to defend our people and fighting without a political vision goes nowhere - our work should improve the position of the negotiators."

But even though the Palestinian bombing campaign in Israel has subsided, the Israeli military onslaught on the occupied territories has pressed relentlessly on. While no civilians were killed in Israel in the three months from early October until at least the middle of this month, both Palestinian civilians and fighters are shot dead in attacks every week - in Nablus alone, 19 were killed in a three-week period over the new year. Given the scale of Palestinian suffering, there are those - including some around the leadership of Fatah and the Palestinian Authority - who now regard the intifada as a mistake that gave Israel an alibi to seize more land. One senior Palestinian security official argues: "The militarisation of the intifada led us down a blind alley. Fatah allowed itself to be drawn into a competition with Hamas and by doing so legitimised violence in Palestinian society and alienated public opinion in the west and Israel. And the violence is out of our control." Hanan Ashrawi, the prominent Palestinian legislator and academic, is guarded, but more critical. "The intifada has been very costly and has distorted the nature of our struggle," she says, leaving towns and villages in the hands of "armed gangs and militias".

But Hussein al-Sheikh - one of the main West Bank Fatah leaders, along with the jailed Marwan Barghouti, blamed by the Israelis for escalating the violence - counters: "The intifada was not our decision. Israel militarised the intifada, not the Palestinians. We in Fatah believe in a historical reconciliation with Israel and this has influenced the forms of our resistance. During the first three months of the intifada, there were almost no Israelis killed, while we had hundreds of martyrs. That's clear evidence that we wanted a popular non-violent movement. But who brought F16s, Apaches and tanks against our unarmed people?" It was only then, he says, that the decision was taken to set up the al-Aqsa Brigades - though their later use of suicide bombings inside Israel was "not part of our strategy".

There are others, such as Azmi Bishara, the charismatic radical Palestinian member of the Israeli Knesset (parliament), who take a less defensive view of the intifada's impact: "One side of the intifada is that the whole world, including Israel, is now convinced by the need for a Palestinian state - that is an achievement of the resistance, not of negotiation. But the way it has been led, without a central command, led to a kind of competition, where the tools of struggle become a way to defeat the other factions - but are irrelevant to the goal of liberation, which depends on convincing Israelis." The PFLP's Majdalawi argues that "in spite of all the suffering our people have had to endure, the intifada has once again made our cause a cause of national liberation". Others are more upbeat still, convinced that despite the overwhelming Israeli military advantage, the intifada has in fact shifted the balance of power in the Palestinians' direction. As the refugee rights campaigner Muhammad Jaradat puts it: "If you look at the situation now, it seems we are losing - but if you look strategically, the Palestinians are winning".

There is no doubt that the intifada has also taken its toll on Israel: as well as the loss of human life, its standing, social confidence and economy have been seriously damaged. More than 200,000 Israelis have left the country since the intifada began, while there is a growing understanding that Ariel Sharon's iron-fist policies cannot deliver security to Israel's citizens. As one senior Israeli political figure puts it, "I'm sorry to say this, but there is a sense in which terror works."

At the same time, there is increasing alarm in the Israeli political establishment about what it regards as a "demographic threat". The fear is that within the next 10 or 15 years, Arabs will form a majority in historic Palestine and that unless Israel separates itself from the main Palestinian population centres, the Jewish character of the state will be imperilled. Sharon's response is his plan for "unilateral disengagement" from the most heavily populated 42% of the West Bank, whose towns and cities would then be walled off from Israel and each other.

For Palestinians, unilateral disengagement is simply an Israeli attempt, as Hanan Ashrawi puts it, to "annex 58% of the West Bank". From his office in Jericho, the last unoccupied town in the West Bank, Sa'eb Erekat, chief Palestinian negotiator and cabinet minister, warns that the consequences of such a move would be dire for Israel as well as the Palestinians. "If the Israelis withdraw unilaterally, the Palestinian Authority will collapse, the role of the militias will grow and they will compete to find ways to send suicide bombers into Israel."

The implications of Sharon's plan go further. Just as the principle of peace in exchange for an independent Palestinian state in a fully decolonised West Bank and Gaza has been effectively accepted for the first time by all Palestinian political factions, the viability of such a state would have all but evaporated. The shrunken chunks of Palestine that are the occupied territories are so forested with militarised Israeli settlements - there are more than 400,000 settlers when east Jerusalem is included - crisscrossed with settlers' bypasses and access roads, stripped of water sources and now squeezed into walls and fences that the scope for a genuine two-state solution has already been put in question. Slash the territory available for a Palestinian state still further through annexation by "unilateral disengagement" - and it risks being swept away altogether. "The continuation of the wall means the end of the two-state solution," Erekat declares. "The two-state solution is being buried by an apartheid system of Palestinian bantustans and walled city prisons."

It's scarcely surprising that Palestinian enthusiasm for the two-state consensus is eroding. The Oslo agreement may have brought the Palestinian leadership home, but it also required them to act as security sub-contractors for Israel in what amounted to a souped-up colony. Now, many Palestinians have begun to wonder whether the kind of state Israel and its US champion are prepared to accept is really in their interests - or whether it will simply amount, as one PLO official puts it, to a re-arrangement of the occupation into a "collection of glorified Indian reservations". If the "two-state moment has been and gone", some ask, then why not instead fight for equal rights, South African-style, in the single binational state that has in practice existed in Palestine since 1967?

This idea, which started as off-stage speculation by intellectuals and advisers, has now entered the Palestinian political mainstream and fuelled Israeli anxiety about the risks for Israel - with only 5.4 million Jews - of continuing to rule over a fast-growing Arab population of 4.6 million in both Israel and the territories. Earlier this month, even the Palestinian prime minister Ahmad Qureia floated the possibility that if Israel pressed on with its wall, the Palestinians might be forced to abandon their two-state commitment and return to the old Palestinian aspiration of a "single democratic state" for both peoples.

But there are precious few takers for such a state among Israeli Jews. The likelihood is that if Sharon presses ahead with his "unilateral disengagement" plan, the immediate result will instead be an escalation of the conflict and increased danger of it spilling over into western states. When asked whether he believes the completed wall will prevent further attacks, the Hamas leader Rantissi replies: "I'm not an expert on the military side, but I am fully confident that new methods of resistance - and new weapons - will be found."

The embattled Palestinian president Yasser Arafat is meanwhile still holed up in the wreckage of his Ramallah compound, where he has effectively been under siege for more than two and a half years. To reach the man who almost single-handedly invented modern Palestinian nationalism, you have to pick your way across mounds of rubble, past buildings half-destroyed by Israeli tanks and through a courtyard lined with sandbags. Soldiers and officials crowd round the entrance to the Palestinian leader's headquarters. In an upstairs room, signing documents at a long table is the 74-year-old survivor of the 1968 battle of Karameh, the Black September war of 1970, the 1982 siege of Beirut and the 2002 assault on Ramallah - the Nobel peace prize winner described by Sharon as "our Bin Laden". Dressed in his trademark fatigues and keffiyeh, he shows little sign of the poor health that is supposed to have brought him to death's door. "Would you like a slice of mango?" he asks. "It's very good for the digestion."

The vilification of Arafat by Israeli and US leaders - which culminated in George Bush's demand that he be ousted and Israel's decision "in principle" to expel or assassinate him - is difficult to explain on the basis of the facts. This is a man who was, after all, denounced by many of his own people as a collaborator for crackdowns on Hamas and other groups during the Oslo period, and there is little evidence to suggest that he has driven, rather than tried to control, the armed campaign against Israel during the past three years. Part of the hostility appears to stem from Arafat's refusal at Camp David to sign up to a settlement he knew would not have commanded the support of his people or delivered a lasting peace. But more than that, Arafat is the only leader whose constituency includes all the disparate elements of the Palestinian people: those in the occupied territories, the refugees outside Palestine, the wider diaspora and the Palestinians of Israel itself. By refusing to deal with Arafat, Israel and the US seem intent on breaking the key political link with the refugees in order to reach an internal deal with a local West Bank and Gaza leadership. But Arafat's popularity has been restored by the intifada, his unique position is recognised by all Palestinian factions and the US attempt to build up Abu Mazen last year as prime minister of a state that doesn't exist backfired.

"They know that they can't replace me," the Palestinian president tells me in his office. "We are not in Afghanistan. We are proud of our democracy. Do you remember what we used to say in Beirut? Democracy in the jungle of guns - that was our slogan. I have been the elected chairman of the PLO since 1969. I was elected president of the Palestinian authority under international supervision in 1996 and we have proposed to the Quartet [the US, EU, UN and Russia] that new elections be held this April or June. But the situation on the ground makes elections very difficult." What Arafat avoids spelling out is that the US and Israel are determined to avoid new Palestinian presidential elections - because they know Arafat would win. In any case, as Arafat points out, Abu Mazen failed as Palestinian prime minister "because the Israelis didn't give him anything - no release of prisoners, nothing on the building of the wall, no lifting of the siege of the president".

So how does the veteran Palestinian leader feel about Israel's threat to kill him? "What do I care?" he retorts derisively. Arafat believes that Sharon's particular hostility to him goes back to Israel's invasion of Lebanon of 1982, when the then Israeli general failed to destroy the PLO or kill its leader. "He can't forget his defeat in Beirut," Arafat says, smiling. But characteristically at pains to emphasise his peacemaking credentials, he goes on to recall that he personally negotiated across the table from Sharon at the Wye Plantation talks in Maryland in 1998 and has given permission for officials to meet the Israeli prime minister. When it comes to Camp David, the Palestinian leader says the negotiations broke down because the then Israeli prime minister Ehud Barak "insisted that the borders with Egypt and Jordan should be under their control, as well as the airspace and the sea around Gaza," and that Israel should have sovereignty over the land beneath the Haram al-Sharif in Jerusalem [Islam's third holiest shrine]. But Arafat is warm about last month's unofficial Geneva accord - which sets out the framework of a possible peace deal - and dismisses widespread Palestinian concern over its effective abandonment of the refugees' right of return. "It's not binding because they weren't official talks, but we appreciate it," he says, adding that a broad approach to solving the refugee problem was in any case worked out at Camp David and in the subsequent Taba negotiations. "We have to start directly with the refugees in Lebanon because they are in a very difficult situation."

But it is when the intifada comes up - and reports that he has authorised payments to the families of al-Aqsa Brigades fighters - that Arafat becomes most engaged."When the South Africans' envoy came here, she told me what our people are suffering was not experienced even in apartheid South Africa," he says heatedly. Brandishing photographs and maps,he goes on:"Our people are facing military escalation day and night. What should we do - should we yield? It is my duty and the duty of the authority to give support to prisoners' families. We are responsible for Palestinians everywhere."

As to Sharon's latest plan, the Palestinian president asks rhetorically: "Will they solve their problem by withdrawing unilaterally? We are committed to peace, but everything changed after my partner Yitzhak Rabin was killed. What we need now is a strong push from the international community - and the rapid deployment of UN forces or observers." Arafat has invested more than anyone in the two-state solution, and he reels off a list of PLO and PA commitments, stretching back into the 1980s, to accept the West Bank and Gaza as the limit of Palestinian national aspirations. But even he now concedes, "Time is definitely running out for the two-state solution."